Economic growth is set to grow by +6.7% in 2018. Activity is underpinned by strong exports performance and solid growth in domestic demand. The near term outlook is favorable as the economy benefits from a continued rise in investment inflows. Robust competitive advantages (cheap labour cost, e.g.) support an expansion of manufacturing and exports.

The long term outlook is also improving as the government steps up efforts to improve the business environment. Key measures include infrastructure development, the reduction of state involvement and improved business registration, tax payment and customs procedures. Against this background, Vietnam jumped 14 places to 68th out of 190 economies in the latest World Bank’s Ease of Doing Business rankings. Moreover, the economy continues to improve its integration into the global economy with the implementation of new trade agreements (Vietnam-EU trade agreements).

The public debt is high compared to regional peers with a ratio to GDP above 60% GDP. The fiscal deficit is large as well, and is estimated at -5.8% of GDP in 2017. Looking ahead, fiscal risks are elevated with contingent liabilities from bank and SOEs reforms. We see modest improvement in the near term based on improved revenues as economic growth quickens and fiscal reforms as the government broadens the tax base and streamlines spending. Fiscal deficit should reduce slightly to -5.6% GDP in 2018.

On the financial side, macro prudential policies such as tightened ratios for real estate loans were implemented to reduce financial risks. Yet, banking risk remains elevated with limited progress in non-performing loans resolution: the total NPL ratio stood at 5.8% at end 2016 according to IMF estimates. Bank recapitalization efforts were sluggish while credit growth remains strong at above +15% y/y in 2017.

The external liquidity position is weak with foreign exchange reserves covering a mere 2-3 months of imports. External debt is high, close to 50% of GDP. The current account is in surplus but on a decreasing trend as imports grow at a strong pace in line with domestic demand dynamism. FDI inflows are strong as the country is seen as a strong alternative to China but strong short-term capital outflows (due to the Fed’s tightening) are still a drag.